>India Financial Services Budget F2010 – Key Takeways

The Union Budget announced on Friday (Feb 26) was moderately positive for Indian banks/NBFCs: There were five key announcements from a banking industry perspective:
a) lower government borrowing program on a YoY basis;
b) government plans to infuse equity capital to the tune of US$ 3.5bn in SOE banks;
c) the RBI is considering giving fresh bank licenses;
d) extensions of farm loan waiver scheme by six months;
e) extension of the interest subvention scheme for low-cost housing financing by one year. We discuss these in greater detail in the following paragraphs.

1. Reduced tail risk from bond holding for SOE banks…but near term pressure likely to persist: The Central Government indicated that its net borrowing requirement will be Rs3,450 bn in F2011 – i.e. 13% lower than in F2010. We believe this helps reduce the tail risk of a very sharp rise in long bond yields. In the near term, there may be some pressure from the higher taxes on certain oil-related products (and consequent impact on inflation). But we expect the yield curve to start flattening, a positive for deposit-rich banks.

2. Capital infusion in state-owned banks: The government announced plans to infuse equity capital to the tune of Rs165 bn (US$3.5bn) in SOE banks so as to ensure they are able to attain a minimum 8% Tier I ratio
by Mar-11. This is a big pickup from the Rs19bn infused in F2009 and Rs12 bn in F2010. The government would fund Rs150bn out of the total Rs160bn using the loan secured from the World Bank for the purpose of capitalizing SOE banks.

Banks that would benefit from this would be those where the Tier I ratio is already weak and where government ownership is close to the minimum requirement of 51%. As can be seen in the Exhibit on the previous page, the banks that stand to benefit include IDBI Bank, Dena Bank, Vijaya Bank and Andhra Bank. Given the relatively large amount provided by the government, we believe that the other SOE banks will also receive equity for funding growth plans from the government.

3. RBI considering giving out fresh banking licenses: The Finance Minister indicated that the RBI is considering giving additional licenses to private sector players and NBFCs. As of now, there is no additional information with regards timeline or the criteria that RBI would use to give out licenses. This move
will be beneficial for NBFCs, since it could give them access to more stable deposit funding. Below we give a list of covered and non-covered names in this space.

To read the full report: INDIAN FINANCIAL SERVICES